Six Dangerous Myths About the Pay

Many managers have bought into expensive fictions about compensation. Haveyoul

SIX DANGEROUS MYTHS ABOUT PAY

BY JEFFREY PFEFFER

pays an average second pays C average of $21.52hourly wage of $r8.o-/. Theother directan an hour. Assuming that employment costs, such as benefits, are the same for the two groups, which group has the higher labor costsl

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ONSIDER TWO GROUPS of Steel minimUls.

One group

An airline is seeking to compete in the low-cost, low-frills segment of the U. S. market where, for obvious reasons, labor productivity and efficiency are crucial for competitive success. The company pays virtually no one on the basis of individual merit or performance. Does it stand a chance of success^

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A company that operates in an intensely competitive segment of the software industry does not pay its sales force on commission. Nor does it pay individual bonuses or offer stock options or phantom stock, common incentives in an industry heavily dependent on attracting and retaining scarce programming talent. Would you invest in this company^

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Every day, organizational leaders confront decisions about pay. Should they adjust the company's compensation system to encourage some set of behaviors? Should they retain consultants to help them implement a performance-based pay system? How large a raise should they authorize?

ARTWORK BY CRAIG FRAZIER

SIX DANGEROUS MYTHS ABOUT PAY

about compensation tbat bave somehow come to be seen as the truth. Do you think you have managed to avoid these myths? Let's see how you answered the three questions that open this article. If you said the second set of steel minimills had higher labor costs, you fell into the common trap of confusing labor rates with labor costs. That is Myth #1: that labor rates and labor costs are the same thing. But how different they really are. The second set of minimills paid its workers at a rate of $3.45 an hour more than the first. But according to data...